I'm currently investing money in an employee sponsored 403b. I'm a teacher so the choices provided were not that great. Basically came across salesman trying to sell a product. Great options, right?! I'm in an class A allocation fund were I pay 5.5% of the amount of money I deposit each time. I also pay an expense fee of 1.19%. I currently have 40,000 in the fund and my wife and I together make about 120,000. My question is should I continue investing in this fund or should I stop and open up a roth IRA with cheaper fees. I'm asking because with compound interest I'm wondering if the 403b funds will grow quicker than the roth. If I open up a roth I'm basically starting over. Thanks

Thu Oct 17, 2013 9:21 pm

oldguySenior Member

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quote: I'm asking because with compound interest I'm wondering if the 403b funds will grow quicker than the roth. If I open up a roth I'm basically starting over. Thanks

It depends on what you invest in - you can invest your roth money and/or your 403b money in whatever you like. But in general, the US stock market Index) has returned about 11%/yr over the last 30 years. (actually it's done better recently, it has nearly doubled since 2008.) So the key for you is (1) make certain that you are invested in 11%/yr products, and (2) cut the overhead. (you are losing 6.7% of your first year's 11%/yr immediately.)

You have mentioned two account-types - pretax & posttax. A third account-type is the Taxable Account, that is investment money that is immediately accessible to you (a fallback EF), it grows tax-deferred, it is pre-59 1/2 money for kid's college, for rental houses, etc. This account is often over-looked by the young since the 401k, 403b, roth, get all of the attn.

We used all three account-types during our working years. The Tax Code is a work in progress, you cannot know what the rules will be in 30 yrs -so it is good to fund all 3. But no matter what account types that you keep your investments in, the rate of return is the key metric. Eg, $5000/yr at 11%/yr for 30 yrs is over a million. And you should be investing about $15,000/yr of your $120,000, that will be over $3M for you in 30 yrs.

I have heard school administrators say that teachers are low paid so they must invest very conservatively - cd's savings - to be safe. Actually, the opposite is true - a steady reliable income stream trumps a variable income (strikes, slow construction, layoffs, etc). Teachers are in an excellent position to place >10% of 'gross' into an 11%/yr fund and never interrupt the power of compounding for 30 yrs.

edited to fix quote

Fri Oct 18, 2013 12:56 am

coasterSenior Advisor

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siniscta, your duplicate post was removed.

~Tim~

Fri Oct 18, 2013 4:36 am

sinisctaNew Poster

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situation

Thanks for your reply old guy. My wife and I are 45 yrs old. Our incomes are maxed out. I don't have 30yrs to invest. My wife and I currently invest 10% of our incomes towards our pensions so I'm looking to invest 5% more into our 403b. The 403b has high fees 5.5% front load and 1.19% expense fee. That's the best choice provided by my employer. There is currently 40,000 in the 403b. Do I continue to invest in the 403b regardless of the high fees? Or do I set up a roth full of index funds (low fees) and stop the 403b? Considering both options perform the same (hypothetical) what is the better option: Compounding interest and high fees vs low fees and starting roth from scratch?

Fri Oct 18, 2013 12:52 pm

oldguySenior Member

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Considering both options perform the same (hypothetical) what is the better option:

The big question is - what are you investing in inside the two accounts? Eg, if you invest in the SP500 Index Fund in both accounts they will perform the same (minus the load & the fee). But if you invest one account in CDs and the other in a mutual fund they will perform vastly different.

I don't have 30yrs to invest.

True - but you'll probably be surprised at how much your account keeps growing after you retire (my IRA has doubled since retirement).

Fri Oct 18, 2013 7:37 pm

clydewolfSenior Member

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Re: situation

quote:Originally posted by sinisctaThanks for your reply old guy. My wife and I are 45 yrs old. Our incomes are maxed out. I don't have 30yrs to invest. My wife and I currently invest 10% of our incomes towards our pensions so I'm looking to invest 5% more into our 403b. The 403b has high fees 5.5% front load and 1.19% expense fee. That's the best choice provided by my employer. There is currently 40,000 in the 403b. Do I continue to invest in the 403b regardless of the high fees? Or do I set up a roth full of index funds (low fees) and stop the 403b? Considering both options perform the same (hypothetical) what is the better option: Compounding interest and high fees vs low fees and starting roth from scratch?

Does your employer make a matching contribution to the 403b?
If yes, then contribute enough to the 403b to qualify for the maximum employer matching contribution.

If no, then contribute to the ROTH IRA for you and your spouse. At 45 years of age, your maximum contribution for 2013 will be $5,500 for you and the same for your spouse.
Note, your ROTH Contributions are after tax.

Then if you want to contribute more, use the 403b. You are allowed to contribute to both the IRA and the 403b.
The only limiting factor is can you afford to do both?